UPDATE 2-California budget watchdog applauds Brown's plan

January 14, 2013|Reuters

* Revenue, spending mostly in balance

* Economic expansion, tax hikes seen boosting revenue

* Credit rating could be raised

By Jim Christie

SAN FRANCISCO, Jan 14 (Reuters) - California's budgetwatchdog largely commended the first projected surplus in yearsunveiled by Governor Jerry Brown, saying in a report on Mondaythat the state's spending and revenue in his budget plan werenow "roughly in balance."

That compares with previous budget plans that had to tackleoften massive budget gaps, the Legislative Analyst's Office saidin its report.

"Over the past several years, each January Governor's budgethas included billions of dollars in proposed solutions - expenditure reductions, revenue increases, borrowing and otheractions - in order to close budget shortfalls," the report said.

The Legislative Analyst's Office only in November hadpredicted a nearly $2 billion deficit.

The Democratic governor on Thursday delivered some rare goodnews in his spending plan for the state's fiscal year beginningin July, saying California's budget deficit is gone after yearsof financial troubles, allowing for increased spending oneducation and healthcare.

Supported by a state economy expanding quicker than the restof the nation and new revenue from tax increases, Brown's planincludes a surplus of $851 million, in addition to a projected$785 million surplus for the current fiscal year, which ends inJune.

California, where deep deficits were also common before the2007-2009 recession, has the nation's lowest credit rating: A-minus by Standard & Poor's. But the rating agency has apositive outlook on California and sees the potential for anupgrade if the state maintains fiscal discipline.

The office's report on Monday applauded Brown's vow to holddown most state spending and suggested caution.

Some Democrats would like to see more funds going to socialservices after years of steep cuts and hope to increase spendingnow that they have a supermajority of seats in the legislature.

"The governor's emphasis on fiscal discipline ... iscommendable, especially in light of the risks and pressures thatthe state still faces," the report said.

The report added that there are "still considerable risks torevenue estimates given uncertainty surrounding federal fiscalpolicy and the volatility inherent in our revenue system."

PENNY-PINCHING GOVERNOR

Brown said California has to hold down most of its spendingdue to uncertainty about the direction of talks in Washingtonover the federal budget and the economic recovery. He also isconcerned about potential increases in healthcare costs andlawsuits that could block parts of the state budget.

Brown is correct to stress fiscal discipline given thepotential risks to the state's revenue, especially risks frommoves in Washington that could hurt the economy, StateController John Chiang told Reuters on Monday.

"We still have Washington that has to make some verycritical decisions," Chiang said.

Under Brown's budget plan, spending in the upcoming year isset to rise $4.7 billion from the current 2012-13 budget.Schools and universities will get a $4 billion boost, healthspending will rise $1.2 billion, while transfers to localgovernments will drop $2.1 billion.

Brown also wants to put $1 billion in a rainy-day fund, paydown internal loans used to help close budget gaps over the pastdecade and put the state in a position where it can postsurpluses in future fiscal years.

While California's finances appear to be stabilizing, inpart thanks to tax increases approved by voters in November, thestate will still face serious budget challenges, the LegislativeAnalyst's Office said in its report.

The office pointed to "huge unfunded liabilities associatedwith the teachers' retirement system and state retiree healthbenefits."

"As such, the state faces daunting budget choices even in amuch-improved fiscal environment," the report said.

HJ Sims analyst Dick Larkin has concerns that California'srevenue may not meet the Brown's administration's forecast. Buthe said the governor's budget plan is reasonable and that if ashortfall reappears it will be manageable thanks to more moneyflowing into California's coffers.

Larkin expects the state will see its general obligationbond rating raised one notch before the end of this year. "Itlooks like California has finally turned the corner on creditrisk," he said, adding that rating agencies "have just beenwaiting to bring California out of the basement."